MAP Pharmaceuticals: Short Opportunity After The FDA CRL

On March 26th, 2012 MAP Pharmaceuticals, Inc. (NASDAQ:MAPP) announced that the United States Food and Drug Administration [FDA] had issued a Complete Response Letter [CRL] to its New Drug Application [NDA] for LEVADEX® (dihydroergotamine) inhalation aerosol.

Biotech companies with a single drug usually get crushed after they get a CRL from the FDA. In most cases these companies drop 50% - 80%. MAP seemed to follow this trend as the price dropped 24% to $13.76 when trading resumed, but then the price action surprised the trading community by making an amazing comeback (at one point even going green for the day). Eventually, the stock closed at $16.44, which was a surprisingly small 4.25% decline.

While impossible to know for sure, it appears that one of the main reasons behind the recovery was the hope that the CRL was over minor issues, which meant that the company could quickly gain approval.

In fact, look at some highlights from MAP's press release:

The FDA did not cite any clinical safety or efficacy issues. In addition, the FDA did not request that any additional clinical studies be conducted prior to approval.

The FDA requested that the Company address issues relating to chemistry, manufacturing and controls (CMC) and observations from a recent facility inspection of a third party manufacturer.

MAP Pharmaceuticals plans to request a meeting with the FDA to discuss the issues raised in the Complete Response letter.

The main question is this: How long it will take MAP to answer the FDA's questions?

While investors were clearly relieved that MAP is not being asked for any more long-term clinical trials to assess safety or effectiveness, the company still cannot say how long it will actually take. The company tried to cool down the disappointment by claiming that their "goal is to respond to the FDA's complete response letter as aggressively and quickly as we can."

Despite their assurances, MAP remained somewhat guarded and even refused to answer select questions on their post-CRL conference call. For instance, a hedge fund manager asked a simple, but interesting, question of the total length (in pages) of the CRL but rather than simply disclosing the information the company refused to disclose any information. This led many to believe there may be more to the CRL than the company is indicating.

To get a good sense of how long it will take to get potential approval, investors have to understand the process and timeline of filing the resubmission. First, the company needs to request a meeting with the FDA to discuss the issues raised in the CRL. A meeting scheduled with the FDA may take two to three months. At that meeting, MAP will receive certain clarifications regarding the CRL. Second, once the company gets clarity on the set of issues, it has to be able to properly address all of the requests. If the company has no need to conduct a new clinical trial, we can estimate that it will take an additional 3-4 months. The third step is the NDA resubmission, where the FDA will notify the Company within 14 days if they accepted the NDA resubmission and assign a Class I or Class II review:

Class I is a two month review from the date of submission.

Class II is a six month review from the date of submission.

If we look at the FDA POLICY AND PROCEDURES , then it appears that there is little chance for MAP to get Class I review. In order to qualify for a class I, the CRL would have to fall into one of the following categories:

Class I Resubmission - A resubmission that includes one or more of the following items: 1. Final printed labeling 2. Draft labeling 3. Safety updates submitted in the same format, including tabulations, as the original safety submission with new data and changes highlighted (except when large amounts of new information, including important new adverse experiences, not previously reported with the product are presented in the resubmission) 4. Stability updates to support provisional or final dating periods 5. Commitments to perform mandatory post marketing studies, including proposals for such studies 6. Assay validation data 7. Final release testing on the last 1-2 lots used to support approval 8. A minor re-analysis of data previously submitted to the application (determined by the FDA as fitting the Class 1 category) 9. Other minor clarifying information (determined by the FDA as fitting the Class 1 category)

As such, I anticipate that MAP will get a Class II resubmission according to the data that was requested by FDA. This implies a process that will take at least 11 to 13 months. This timeline is important as MAP only has cash and cash equivalents of $98.8 million as of December 31st, 2011. The cash burn in the most recent quarter was $14.6 million (4th quarter 2011), which implies a yearly burn of $55.7 million. This would leave the company with only about $28 million in cash at the time of the new PDUFA date. The question then is whether that is enough to hire a sales force or file regulatory documents without a going concern clause. The answer is that it is not, which makes it highly likely that MAP will need to raise cash this year.

All the reasons mentioned above lead to one option, a short position or put options on MAP is the only way to benefit from the bleeding of the price that just started Wednesday last week.

Technical Analysis

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The price broke down from an uptrend channel with huge volume, which indicated the direction of the new trend. The price did bounce from the low of $13.76 back into the channel but the price declines thereafter created a "three black Crows" candlestick formation. This consists of three large, consecutive, declining candles. The formation preludes lower prices, especially after a strong advance higher. In addition, the price broke below the 50MA and the 200MA, which are usually strong support. Adding to the bearish picture is a negative divergence in the MACD and the RSI. Finally, with the Stochastic heading down as well, the momentum is absolutely negative.

The next point of downside support is the $13.76 point that created on the CRL day but strong support does not really begin until $10.54. While there may be a few days of sideways trading, the new bearish trend has begun and the price will keep heading down as there is no real catalyst in the near future to keep interest in MAP.

One source of support has been the high percentage of institutional holding (92.1%) and this likely kept the price from falling 50% - 80% after the CRL. It is unlikely that these institutions will sit and hold through the ride down and it will only take one large exit to start a larger move towards the doors.